Pricey Retail Shares Are Hardly a Bargain

The SCC was trading at $90 at the time and proceeded to have one crazy year: it hit $103 within 10 days and $180 in late October before going down all the way back to $120 by Election Day. At the last market bottom on Nov. 20 it topped out at $200.86 a share. Why rehash the recent past? Because the SCC is now fetching less than $82, well below its baseline over the last year.

Clearly, it's not because retailers are doing well. But it does highlight the fact that the consumer index the SCC bets against is up 29% from the Nov. 20 low, while the S&P Retail Index is up 38% over that span. (The lesson here, I think, is to never let a double inverse ETF go against you.)

The most damaging breakdown occurred on the last full trading session before Christmas, when SCC slumped 25%. Curiously, the index the SCC was betting against was actually down on the day. So either that was arbitrage catching up to the prior month's retail rally, or else speculators trying to get out while the getting was still good, all at once.

That would have made sense: retail stocks had been on a roll and headed into January, traditionally a strong time for that sector. The broader market had been acting better of late. Consumers were as depressed as they've ever been, and there was massive fiscal stimulus on the horizon.

Who'd want to bet against continued gains by retail shares? Now, just two weeks later, I'm starting to wonder who wouldn't, especially on the heels of the recent gains. Even after today's shakedown Wal-Mart still fetches almost 9 times cash flow and sports a price/earnings ratio of 14, hardly a token of value in this day and age.

The DJ Consumer Services Index is down just 24% in the last year, shielded somewhat from the full brunt of the retail slump by its defensive tilt toward McDonald's and (at least until today) Wal-Mart. But as we've seen in recent months, neither Wal-Mart nor McDonald's is completely secure from the drastic paring of discretionary spending now underway.

With the economy currently shedding a million-plus jobs every two months, it's time to give the SCC another look, if only as a bear-market hedge. Because even is the recent upturn in stocks proves durable, Macy's won't be leading this parade.